Remarks by the Governor at the Cabinet Meeting on the Approval of the Increase in Competition and Reduction of Concentration

Slightly
more than one year ago, the Minister of Finance and I established a committee
to examine increasing competition in the financial system (the Strum Committee).
About a month ago, we were here at the Cabinet and we all commended the
Committee for the serious work that was done as well as the success, of all the
Committee members, in formulating recommendations for the good of the consumers
and in maintaining the system’s stability.

Since
then, there has been fast-paced work done to turn the recommendations into
legislation, in a short amount of time and in a collaborative effort, and I
want to commend all the partners—Strum Committee members, Ministry of Finance officials,
Ministry of Justice officials, and representatives of the Bank of Israel.

The
changes established by the law, and primarily the recommendation to separate the
two credit card companies from the large banks, alongside initiatives led by
the Bank of Israel and the Banking Supervision Department—such as establishing
a Central Credit Register, providing an outline for setting up completely new
banks, promoting increased efficiency in the banking system, and advancing
technology and innovation in the banking system, have created in recent years
an advanced banking system and more competition in the retail and small
business sectors. It should be remembered, with that, that financial system
change requires fundamental, long term, and thought-out processes, as well as
some patience—the benefits of the reform will be obtained by the public
gradually, over time.

In
the bill presented here today, there are still some issues that require
additional fine-tuning. One of them is the ownership of Shva (Automated Banking
Services Ltd.)—the company that produces the interface between credit card
issuers and acquirers. In general, marked changes have been made recently in
the area of payment systems, led by the Bank of Israel. These changes include opening
the Shva protocol and establishing the terms of access to the payment systems,
which will allow the entrance of new players into the system. The steps carried
out by the Bank of Israel will respond to the requirement to reflect the needs
of the various entities in the market. In addition, these are significant steps
requiring material changes by Shva itself, and a change in ownership at this
time may delay the advancement of such steps. I am convinced that with good
will, and with the recognition that it is important that the promotion of these
issues is done by agreement, on the basis of professional entities’
assessments, we will be able to reach agreements on the legislation process,
both on the issue of Shva and on other issues that are still in disagreement.

With
regard to the risks inherent in the reform, as some of the Ministers in the
Cabinet meeting a month ago noted, there are two main risks with which we will
need to deal: the first is that more banks, and more small banks, and more
nonbank financial intermediaries, means a higher risk of collapse of a
financial intermediary; the second is the trend of rapid expansion of credit to
households. Therefore, it is important that increasing competition in the
credit market, which is important on its own, be done carefully, with attention
paid to developing risks and with appropriate supervision of the new credit
providers. The Financial Stability Committee, about which a legislative memorandum
was published about two weeks ago, and which will institutionalize the
collaboration and coordination between the various regulators on the financial
system, will have an important role in ensuring the monitoring, early
identification, and timely handling of risks to the financial system. Against
the background of the changes expected in the financial system, there is
particular importance to completing the legislation for setting it up as soon
as possible.

Another complementary and necessary step is
the promotion and improvement of tools to deal with a bank facing difficulties
and a failing bank. This includes deposit insurance. These tools, which have
become very common worldwide, among other things after understanding the
lessons of the financial crisis, will provide a safety net in the case of a
bank encountering difficulties, such that the adverse impact on depositors, the
financial system, and the economy will be moderate.

I can assure you that the many steps we are
taking in the area of competition are being taken responsibly, after serious
and professional consideration of the possible costs and benefits deriving from
each step, and this is a critical condition for the success of the steps while
minimizing the risks existing in the process.

In conclusion, the steps in the bill will lead
to a material change in the level of competition in the financial system. It is
important now to focus on implementation of the reforms, and to give them time
to have an impact. These are major changes, and we also need to allow the
system to adjust to them and to reach the new equilibrium that will be created
as a result of the changes and reforms.